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Watch Out, Amazon — The Mini Is Smarter Than the Dot

Advances in artificial intelligence (AI) have led to numerous product enhancements and developments, but one that has significant potential to change how we live is the smart speaker. These devices, powered by AI-based virtual assistants, can perform a variety of hands-free tasks.

Amazon.com, Inc. (NASDAQ: AMZN) was first with its Alexa-enabled Echo speaker in 2014, which has since evolved into a family of products with varying capabilities. Alphabet Inc.(NASDAQ: GOOGL)(NASDAQ: GOOG) was next, giving us the Google Home speaker powered by Google Assistant. At a product launch earlier this month, the company released the Google Max aimed at audiophiles, and the Mini -- a direct competitor to Amazon's Echo Dot.

Amazon had the market to itself for two years, but the competition has arrived and with it the inevitable question: Which is a better device? Let's review the evidence and see what we find.

Amazon Echo has a substantial lead in the smart speaker market. Image source: Amazon.

Different approaches

While the products made by both companies are smart speakers, each has taken a different approach to the technology. In many ways, the devices are similar. You can engage each with a wake word -- "OK Google" for the Home and "Alexa" for the Echo. Both can set timers and alarms, stream music from various services, and control smart home appliances. You can use either to order a pizza or a ride-hailing service. Beyond that, there are some significant differences.

Amazon's digital assistant Alexa, which is the software to Echo's hardware, only responds to precise commands, called skills. The list of these voice-powered apps is extensive, up to 25,000 at last count, but they require specific language in order to work. Any deviation from the actual command, you are likely to hear, "I can't find the answer to the question I heard." Alexa isn't capable of searching the internet for basic facts.

Google Home, on the other hand, is powered by Google Assistant, which in turn uses the company's internet search and underlying data as a knowledge base. This provides a much deeper reservoir for answering random questions. While it doesn't yet have the volume of third-party apps or the number of models Amazon has released, those will come in time.

How smart?

Digital marketing agency 360i conducted a fairly extensive test comparing the capabilities of Google Home and Amazon Alexa, using proprietary software to ask the devices over 3,000 questions. The test concluded that "Google Home is six times more likely to answer your question than Amazon Alexa." They concluded that these findings underscored the power of online search.

Some believe that Amazon's lead may be insurmountable at this point. Market research company eMarketer estimates that Echo devices will control more than 70% of the smart speaker market for 2017. Amazon has released a second generation of devices in an effort to maintain its lead.

What's at stake?

RBC Capital Markets analyst Mark Mahaney believes that Amazon could have north of 500 million active customers globally by 2020 and that Echo devices could achieve a 40% penetration rate in its U.S. market and 25% adoption internationally. Assuming consumers replace the devices every two years, this could generate an additional $5 billion in revenue for Amazon in 2020.

Mahaney also found that 17% of Amazon customers use the device to order items from the e-commerce giant's website. This should accelerate as more customers adopt the technology. He believes that active customers could increase their spending by $40 per customer and, with an estimated 128 million devices installed by 2020, this would result in an additional $5 billion in revenue.

In 2016, Amazon generated net sales of $136 billion from all sources. Having a side business add $10 billion to revenue would be significant.

In the final analysis

Over the long term, consumer preference will dictate which device reigns supreme. Amazon has a sizable head start, but Google Home devices can respond to a wider variety of requests, potentially providing a better overall experience. Since this technology is still in its infancy, I'm betting that there will be room for more than one winner.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Danny Vena owns shares of Alphabet (A shares) and Amazon. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), and Amazon. The Motley Fool has a disclosure policy.